"Money-Market Mayhem"

This is the last of the letters we pounded out to zip off to the Wall Street Journal. Well, maybe we only sent half of them, but that's at least 50% less disappointment we've suffered, plus the chagrin of seeing obviously less recondite albeit turgid missives given such play on the editorial page. In any event,

Dear Sir(s):

In "Money-Market Mayhem" (06/27/11, A16) you accurately point out that external controls in the form of government regulations enforced by "regulatory wise men" have proven inadequate to the task of eliminating unnecessary systemic risk. Unfortunately, you identify the underlying problems as, one, government legislation that assumes regulators are omniscient, and, two, that regulators are not fixing obvious problems.

On the contrary, the most basic problem is that the repeal of Glass-Steagall and similar legislation led directly to the combination of incompatible functions within the financial services industry. The most fundamental precept of good internal — systemic — control, separation of function, was violated in the name of increased efficiency and enhanced competitiveness.

Regulators, however skillful or well-intentioned, are thus faced with the nearly impossible task of proving that something otherwise legal ought not to be done or should not have been done, rather than establishing a violation of a specific rule. What is needed is not more external government regulation, as intrusive as it is ineffectual, but effective internal, that is, systemic controls of the financial services industry.

Yours,

Yadda, Yadda, Yadda

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"Why the Old Jobs Aren't Coming Back"

Do you know what the chief problem is with communicating the Just Third Way, even with an incredibly erudite blog such as this? You'd think that with a neat name like "Center for Economic and Social Justice" we wouldn't have any trouble. Well . . . maybe not. Even so, it's not trying to get across what we mean by "economic justice" or even "social justice." Those are easy — just go to our glossary.

No, the hard part at this time (as least as this writer sees it) is to get across the idea of binary economics, and the potential for real full employment of all resources through ownership financed with pure credit, not just fake full employment of human labor financed with deficits and redistribution of existing wealth. And you thought explaining Einstein's theory of relativity ("I have this theory about my relatives . . ." — Albert Einstein as "Al One-Rock, stand-up physicist") was hard.

Anyway, here's our commentary on the usual proposal to increase effective consumer demand and thus the demand for capital by cutting consumer demand, thus taking away the incentive to finance new capital. (Don't try to figure it out. If you're a Keynesian, Monetarist/Chicagoan, or Austrian, you accept this on faith. If you're a binary economist, you're hopelessly baffled by the contradiction.) This is a letter we almost sent last week to the Wall Street Journal, but figured they wouldn't get it, or would print it by mistake as a "Pepper and Salt" cartoon.

Dear Sir(s):

In "Why the Old Jobs Aren't Coming Back" in today's Journal (p. A11), Michael Spence makes some interesting, but contradictory points. He claims that we can grow the economy by reducing income growth, increasing savings to finance investment, and expanding exports.

Increasing savings and slowing income growth both contribute to a decline in effective demand. This, in turn, makes new capital investment less financially feasible. Trying to increase exports at the expense of meeting domestic wants and needs simply sets up the economy for a Japan-like economic implosion if other countries prove unwilling or unable to purchase U.S. exports.

Rather than relying on cutting domestic consumption in order to accumulate savings for investment, a sounder approach would be to use the commercial and central banking system as intended to finance growth, pay out earnings to increase effective domestic demand, and meet the consumption needs of America first.

Sincerely yours,

Generica P. Thunderblast

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"Nader Kindles Fires of Revolt"

This is the second in our series of letters we've written to the Wall Street Journal in the past week or so, otherwise known as "Letters That the Wall Street Journal Ain't Gonna Publish, or, I'm Too Lazy to Write a Special Blog Posting for Today, So I'm Glad They Didn't." Or you could just call it "Today's Blog Posting." Anyway:

Dear Sir(s):

Color me (pleasantly) surprised. I had no idea, from my previous experience with Ralph Nader [this was written for Norman Kurland to send], that he would come out in favor of restoring the rights of private property to corporate shareholders. ("Nader Kindles Fires of Revolt," Wall Street Journal, June 24, 2011, C1.)

Nader's demand that Cisco Systems start paying out bigger dividends probably wouldn't increase share value. It would, however, restore some of the traditional rights of private property, e.g., the right to receive the "fruits of ownership" (income), taken away from minority owners in such decisions as Dodge v. Ford Motor Company, 204 Mich. 459, 170 N.W. 668. (Mich. 1919), in which the Michigan Supreme Court did affirm the right of minority shareholders to a dividend . . . but only if (under the "Business Judgment Rule") the withholding of dividends did not harm the company.

Kudos to Nader for championing the property rights of minority owners, and challenging the erroneous belief that retained earnings are essential to financing new capital formation. Let's finance growth by using the commercial banking system and the Federal Reserve as intended, by discounting and rediscounting eligible paper. Let's make all dividends tax deductible at the corporate level, and put corporate income in the hands of people who will spend it on consumption to sustain effective demand at the level needed to make new capital financially feasible and accessible to enable all citizens to become owners of newly issued shares.

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"Of Wealth and Incomes"

You know that response we've been yakking about for the past month to someone who had promised to review one of our books and then backed out? Well, we sent it off this morning to our expert in moral philosophy to review and, when we hear back about how great it is, we'll fire it off to the non-reviewer. Who knows? The fact that it is 32,000 words long (longer than the original book . . .) might stun the non-reviewer to the point where the book might actually get reviewed. Or burned in effigy.

Anyway, that's not what we're posting on today. That's right. You're not in for a 32,000-word posting on esoteric subjects that you could care less about. We're not even sure that Blogger could handle something of that length, or if it would cause the program to go insane.

No, what you're getting today is a copy of one of the letters we sent to the Wall Street Journal . . . you know, gassing on about esoteric subjects that they could care less about, which adequately explains why these letters don't get published. Anyway, here it is:

Dear Sir(s):

In "Of Wealth and Incomes" (Wall Street Journal, 06/24/11, A12), you state, "The problem is that monetary policy is not a laser-guided missile. The Fed can create new dollars, but it can't determine where those dollars will flow," etc. Correction: the Federal Reserve cannot determine where those dollars will go — under prevailing "Currency Principle" assumptions.

The Federal Reserve was established in 1913 under the Banking Principle to "provide for the establishment of federal reserve banks, to furnish an elastic currency, [and] to afford means of rediscounting commercial paper." The "Banking Principle" is based on the "real bills doctrine," an application of "Say's Law of Markets."

The Federal Reserve has the power under § 13(2) to provide liquidity directly for financially feasible new capital investment by rediscounting eligible private sector paper. Dr. Harold Moulton, then president of the Brookings Institution, explained this in his alternative to New Deal monetary and fiscal policy, The Formation of Capital (1935). Louis Kelso and Mortimer Adler advocated broadened capital ownership financed by this method in The Capitalist Manifesto (1958) and The New Capitalists (1961).

From a Currency Principle perspective, the real bills doctrine is nonsense, and Say's Law is either rejected or redefined. Using a tool such as the Federal Reserve, designed to operate in accordance with one principle, to operate in conformity with an opposed principle explains much of the confusion we see today in both monetary and fiscal policy.


Yours,

Blah, blah.

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News from the Network, Vol. 4, No. 25

As we write, the stock market is plunging again as a result of the nervousness of the permanent debt crisis afflicting the world, but popping up most dramatically right now in Greece. We can't say we weren't warned. For thousands of years we've been told that credit extended for productive purposes is good credit, but credit extended to finance non-productive spending is bad. Keynes managed to convince us otherwise, and now we're paying the price. Here's what we're doing to try and fix it:

• We were contacted earlier this week by someone with a very interesting prospect in the Midwest that would, if otherwise feasible, allow for the implementation of a Just Third Way approach to solving the deficit problem afflicting so many cities, states, countries — in short, everybody. It's only a prospect at this point, so we won't say any more about it, other than we'll keep you updated if anything concrete develops.

• Yes, for years there has been massive confusion over the role of the Federal Reserve and even what it is or does. Still, in today's Wall Street Journal there was even more confusion expressed than usual. There were so many articles getting things wrong that we simply had to write a letter. The problem was that there were so many dumb things said that we couldn't narrow down the field to one. We had to go to three . . . and even that didn't use up all the material. This shows the importance of internalizing the principles of the Just Third Way to the point that you can write a letter or three into the Wall Street Journal. We'll try to run the letters next week on this blog if the Journal doesn't publish them . . . which means, look for them on the blog.

• Norman Kurland is planning on attending this year's Caux Round Table in Washington, DC. There seems to be an openness there to many elements of the Just Third Way, and the event offers some very good opportunities to present these ideas to a global audience.

• The National Lawyers Association conference scheduled to begin today in Denver was cancelled due to insufficient numbers of people who signed up. We have a sneaking hunch that the economy might have had something to do with that — evidently lawyers who are concerned with ethics aren't as flush with cash as they might be, and the others couldn't make it because of their tight ambulance-chasing schedule. In any event, we've made some suggestions to the Executive Director of the NLA, e.g., have it in DC next year (they already thought of it), pull in non-lawyers (ditto), and so on, so forth. What we'd really like to see is a focus on a Pro-Life economic agenda, culminating in attending the annual Rally at the Fed along with Pro-Choice groups and anyone else who supports a sound program of economic reform.

• In a bizarre paradox, a CESJ member was banned from posting on a Tea Party website. The stated reason was that the CESJ member was "a radical socialist." A couple of things wrong with the ban. One, not allowing discussion on controversial subjects is a sure way to turn into a navel gazer. Two, since when did advocating widespread direct ownership of private property make someone a "radical socialist"? It may be "radical," but — unless our good buddy Karl Marx was wrong in his summation of socialism as the abolition of private property (it's in The Communist Manifesto) — but it ain't socialist.

• Wendy Wiesner in Denver has started "Ethical Capital." We can't find a website up on it yet, so we don't have any details. More later.

• Jimmie Griffin has started a CESJ chapter in Waterbury, Connecticut. Read all about it in today's Waterbury Republican-American.

• By merest coincidence, an 80-year old CESJ member in Nevada sent us a nice, handwritten letter (her computer is down) giving us (yet another) writing assignment, suggesting a book on how the debt crisis is destroying not only the U.S., but the world. Within minutes of receiving the letter, we received a copy of Harold Moulton's 1943 93-page opus, The New Philosophy of Public Debt, Washington, DC: The Brookings Institution. This was good in many respects, not the least of which is that now we don't have to write the book. Moulton already did it for us. Copies of Moulton's book aren't too hard to obtain, although when we read it we immediately understood why it hasn't been reprinted!

• As of this morning, we have had visitors from 47 different countries and 40 states and provinces in the United States and Canada to this blog over the past two months. Most visitors are from the United States, the UK, Canada, Australia, and India. People in Venezuela, Greece, Honduras, Canada and India spent the most average time on the blog. The most popular posting this past week was once again "Thomas Hobbes on Private Property," followed by "Aristotle on Private Property," the first two postings on "Economic Recovery," and "A CESJ Orientation in Brief."

Those are the happenings for this week, at least that we know about. If you have an accomplishment that you think should be listed, send us a note about it at mgreaney [at] cesj [dot] org, and we'll see that it gets into the next "issue." If you have a short (250-400 word) comment on a specific posting, please enter your comments in the blog — do not send them to us to post for you. All comments are moderated anyway, so we'll see it before it goes up.

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Economic Recovery, Part XI: The Formation of Capital (6)

As we saw in yesterday's posting, the solution to the disappearance of jobs as technology advances is to have workers ' and, eventually, everybody buy the machines that are doing the productive work so that every person can receive capital income as a right of private property.

Unfortunately, from the standpoint of developing an effective solution, almost every school of economics today defines "saving" in terms of cutting current consumption. (Harold G. Moulton, George W. Edwards, James D. Magee, and Cleona Lewis, Capital Expansion, Employment, and Economic Stability. Washington, DC: The Brookings Institution, 1940, 26.) This means that currently accepted economic theory and policy embed the false assumption that financing new capital formation is impossible without existing accumulations of savings.

Hence the importance of The Formation of Capital, the third book in Brookings' series on the distribution of wealth and income in relation to economic progress. Reliance on existing accumulations of savings for financing future growth traps the economy in an inevitable "boom and bust" cycle. Income, instead of being spent on consumption to keep production and consumption in balance, is diverted into savings. With fewer customers purchasing what is produced, the financing of future capital used to produce new goods and services becomes less feasible.

Worse, from the standpoint of political and social stability, using past savings justifies maintaining, even increasing, concentrated ownership of the means of production. It also leads to expanding the role and powers of the State in a desperate effort to stabilize the economy. The rights of private property (i.e., the rights to the fruits of, and control over, what one owns) are taken from individual citizens and transferred to the State.

The logic seems flawless — if we assume as a given that new capital cannot be financed without using existing accumulations of savings. Given that assumption, economic growth and development require a class of people, necessarily small, who cannot consume all they produce. This excess is accumulated as savings. Since savings equals investment, cutting consumption adds to the amount of wealth in the economy, increases production, and, because it accrues to the current owners who re-invest rather than consume a growing portion of their capital incomes -concentrates ownership even further.

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Economic Recovery, Part X: The Formation of Capital (5)

Yesterday we noted Harold Moulton's agreement with Say's Law of Markets when Moulton claimed that, "If we are to achieve the goal of satisfactory standards of living for everyone, the first requirement is to increase progressively the total amount of the income to be divided." Consequently, because "productions equals income," the two most important factors in a program of economic recovery are employment and production.

Any rational person will agree that advancing technology displaces human labor from a specific job. True, the employment of new technologies can, and often has resulted in new opportunities for the employment of the displaced human labor. Even the most ardent Keynesian will admit, however, that the new jobs "created" by advancing technology are not the same jobs taken over by technology. They are different jobs, using human labor to do different things than before.

Thus, as Moulton pointed out in The Recovery Problem in the United States (1936), from 1920 to 1930 — a time when millions of new jobs were being created — the objective number of workers employed in direct manufacturing decreased . . . and this at a time when the output of manufactured goods was increasing at a tremendous rate. The new jobs being created were "white collar" positions in support, administration, sales, and so on. For example, as American business expanded rapidly, there was a great increase in the demand for typists — who replaced copyists and scriveners when the typewriter and carbon paper replaced hand-copied documents.

The problem with the new jobs created by advancing technology is that they, in turn, tend to be eliminated when technology advances still further. The Steno and Typists pools that were a feature of business offices until the mid-1960s were either much reduced or disappeared entirely as the fast, new and relatively inexpensive photo- and thermographic copying machines took over from the old, time-consuming photostatic copiers — and didn't burden the reader with a white-on-black or white-on-blue copy. Much of what was left of stenographers' and typists' jobs then disappeared with the invention of the word processor.

Although advancing technologies, especially in computing and robotics, have the potential to remove virtually all human labor from the production of marketable goods and services, the experts continue to insist that "Technology Doesn't Destroy Jobs" (Dr. Russell Roberts, "Obama vs. ATMs: Why Technology Doesn't Destroy Jobs," The Wall Street Journal, 06/22/11, A15). The argument is that "When it gets cheaper to make food and clothing, there are more resources and people available to create new products that didn't exist before." (Ibid.)

Perhaps, but reason tells us that technology does, in fact, "destroy jobs," as Dr. Roberts admits by citing many of the jobs that no longer exist, e.g., switchboard operators, egg farmers, textile workers, and so on, all replaced by advancing technology. Nor does Dr. Roberts's analysis explain what happens if the methods and means by which the new products are created don't require as much human labor to accomplish, if any at all.

Yes, advancing technology frees people from unnecessary labor. It does not, however, necessarily mean that any burst of creativity or increase in confidence that results will create new jobs, or will create the same or greater number of jobs that were "destroyed" by technology. For "consumers" to be able to purchase the new products and generate the effective demand necessary to provide a market, those consumers — who in many cases are those same workers whose jobs are disappearing — they must have income. Enslaved by the assumption of the necessity of past savings to finance new capital, that means "jobs."

In other words, in Dr. Roberts's scenario, in order for new jobs to be created, the jobs must already exist! The demand for capital — the means by which the new marketable goods and services are produced and jobs presumably created — as Moulton pointed out in The Formation of Capital, is derived from consumer demand. If consumer demand doesn't exist, that is, workers do not have jobs, there will be no reason for people, no matter how creative or confident, to develop new marketable goods and services. People are not fools (usually), and no rational person wastes his or her effort to produce something that nobody wants or needs — or cannot afford to buy.

Thus, contrary to Dr. Roberts's assertions, no amount of creativity or confidence is going to restore a sound economy if the people freed by technology have no legitimate means to derive the needed benefits provided by that same technology. The answer, of course, is (as Louis Kelso observed in an interview in Life magazine in 1964), "if the machine wants our job, let's buy it," meaning the machine. The only question is, how, when workers don't have the money to buy necessary consumer goods and services, are they to come up with the money to purchase the machines that took their jobs and deprived them of income in the first place?

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Economic Recovery, Part IX: The Formation of Capital (4)

We said in the previous posting in this series that the belief that the government can do anything and everything better than the private sector, especially control the financial system, are two of the most damaging assumptions ever made, economically and politically speaking. We could argue whether they are the same assumption, but why waste time on a useless quibble? The fact is that both of these assumptions are themselves rooted in the belief that the only way to finance new capital formation is to cut consumption and accumulate money savings. Given that, and the demand that "the government should do something" leads to the paradox of trying to fix a bad system by making it worse. Nowhere is this more evident than in government manipulation of the financial system in an effort to deny economic reality.

The Formation of Capital upsets one of the most fundamental assumptions in modern economics and finance: that new capital formation is impossible without first cutting consumption, saving, then investing. This assumption leads to treating commercial bank credit as if it were a commodity in limited supply. (Harold G. Moulton, Financial Organization and the Economic System. New York: McGraw-Hill Book Company, Inc., 1938, 402.) Modern economists thereby assert that the "supply of loanable funds" determines the "production possibilities curve," that is, the rate at which economic growth can be sustained.

Moulton believed that treating bank credit as a commodity was largely responsible for the slow pace of recovery from the Great Depression. Consequently (as we have seen), Brookings set out to analyze the financial causes of the Depression and formulate guidelines to develop a recovery program. Brookings published its findings in America's Capacity to Produce (1934), America's Capacity to Consume (1934), The Formation of Capital (1935), and Income and Economic Progress (1935). These volumes examined the structures and institutions of the American economy in the wake of the Crash of 1929, and presented the results of Brookings' "investigation of the distribution of wealth and income in relation to economic progress." (Edwin G. Nourse, "Director's Preface," Dr. Harold G. Moulton's Income and Economic Progress. Washington, DC: The Brookings Institution, 1935, vii.)

Although these books were written in response to a specific set of historical circumstances, the reader will see distinct parallels in the 21st Century with today's economic downturn and global financial crisis. Although Moulton presented basic principle of economic recovery in broad terms and without specifics ("It would need to be highly detailed to meet the peculiar situations of varying industries, and the time is not yet ripe for the presentation of anything more than general principles," ibid., 164.), he clearly stated that, "If we are to achieve the goal of satisfactory standards of living for everyone, the first requirement is to increase progressively the total amount of the income to be divided." (Ibid., 83.) In other words, the solution to economic downturn is not redistribution, but increased production in order to have income to distribute. As Moulton explained,

"The distribution of income from year to year is of primary significance not for its momentary effects upon the well-being of the masses, but for its possible cumulative effects in promoting a fuller utilization of our productive facilities and a consequent progressive increase in the aggregate income to be available for distribution. We are not interested in maintaining a static situation in which the total income, even if equally distributed, would be altogether inadequate; we are interested rather in producing a dynamic situation in which increasing quantities of newly created goods and services would become available for everyone." (Ibid.)

This is consistent with Say's Law of Markets, which, simply stated, is that production equals income, and thus supply generates its own demand, and demand its own supply. As Jean-Baptiste Say explained in response to some criticisms of his theories by the Reverend Thomas Malthus, "if certain goods remain unsold, it is because other goods are not produced; and that it is production alone which opens markets to produce." (Jean-Baptiste Say, Letters to Mr. Malthus on Several Subjects of Political Economy and on the Cause of the Stagnation of Commerce. London: Sherwood, Neely & Jones, 1821, 3.)

The problem, therefore, in any economic recovery, is not over- (or under-) production or consumption, or manipulating the price level, the velocity of money, or, worst of all, the volume of money. The problem is threefold: 1) how to increase production, 2) how to distribute the income from production according to relative inputs of labor and capital, and 3) how to distribute that income to people who will use the increased income for consumption, not reinvestment.

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How Low Cost Labor Threatens America

There was an embarrassment of riches in today's Wall Street Journal — and one of which we could take full advantage.  Usually there's just too much to address, but today our job was easier than usual . . . although, as you might expect from the shape of the world today, never actually easy.  (If you feel like making our lives a tad easier, many volunteer positions are available in the Just Third Way, especially for writers and artists of all types who want some crazy ideas to set them off from the other crazy ideas.



The prize today was a labor lawyer who wrote an op-ed complaining that Boeing's move to a lower-wage area below Mason-Dixon was a virtual death-blow to the economic health of the United States.  In a surprising statement for a labor lawyer, he claimed that the cost of labor is negligible in American-made marketable goods and services . . . suggesting that he's never looked at an income statement.  The big thing, though, was that all those stupid people who work for less than $28/hour are undermining the economy and causing the trade deficit.  We'll cover that claim and others like it when we get around to discussing Harold Moulton's Income and Economic Progress (1935).  Until then, however, you might regale yourself with this letter that we sent off to the Wall Street Journal today:

In "Boeing's Threat to American Enterprise" (Wall Street Journal, 06/20/11, A15), Thomas Geoghegan makes some astonishing claims — not the least of which is that foreign creditors have not used low labor costs to their advantage. Has he ever heard of China?

The real problem, however, is that Mr. Geoghegan assumes that wages alone will deliver justice to America's workers. On the contrary, as the late labor statesman Walter Reuther pointed out in his testimony before the Joint Economic Committee of Congress on the President's Economic Report, February 20, 1967,

"If workers had definite assurance of equitable shares in the profits of the corporations that employ them, they would see less need to seek an equitable balance between their gains and soaring profits through augmented increases in basic wage rates. This would be a desirable result from the standpoint of stabilization policy because profit sharing does not increase costs. Since profits are a residual, after all costs have been met, and since their size is not determinable until after customers have paid the prices charged for the firm's products, profit sharing as such cannot be said to have any inflationary impact upon costs and prices."

The answer to America's decline in competitiveness is not to undermine industry further, but, as Louis Kelso and Mortimer Adler explained in The Capitalist Manifesto (1958), to spread out the benefits of capital ownership to everyone through access to the means of acquiring and possessing private property. As Pope Leo XIII declared in 1891, "We have seen that this great labor question cannot be solved save by assuming as a principle that private ownership must be held sacred and inviolable. The law, therefore, should favor ownership, and its policy should be to induce as many as possible of the people to become owners." (Rerum Novarum, § 46.) This was why Ronald Reagan called for "an Industrial Homestead Act" in 1974 — and why today's labor unions should transform themselves into ownership unions.


Yours,

Blah, blah.

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News from the Network, Vol. 4, No. 24

The situation in Greece has been resolved. Again. Not. It doesn't make any difference, anyway. With France and Germany agreeing to bail out Greece, the day of reckoning has been postponed until the next crisis, scheduled for next week, pops up. The stock market is up again (at least this hour), clearly indicating the gamblers are feeling secure enough to bet our money in the usual heads-they-win-tails-the-government bails-them-out gambit. Okay, so maybe we shouldn't call Wall Street a gambling casino. In a real casino it's the people who play who stand to lose. On Wall Street, the losers are those who don't play.

Anyway, here're the news items from this week:

• Out of the blue this past week we heard from a journalist in China who is interested in agenting the Chinese translation of Curing World Poverty. The journalist, whom Norman Kurland met at last year's Caux Roundtable Conference in Beijing, had not been in touch for almost a year, but had read through the book and described it as "very lucky" that it had come to his notice at this particular time. "Luck" seems to have a much "stronger" meaning in Oriental cultures, so the journalist's interest might be very, er, lucky.

• The CESJ Fellows from Africa had their final session yesterday. Both made serious commitments to follow up on introducing the powers-that-be in Mauritania and Niger to the possibilities of the Just Third Way. We gave both of them complimentary CESJ memberships. Perhaps this is some sort of African reverse hospitality, but the celebratory lunch we had planned for them was replaced by a celebratory lunch they planned for us.

• We are interviewing a prospective intern from Turkey next week, a doctoral candidate who is interested in binary economics as a challenge to the prevailing "economic orthodoxy."

• We have finished the draft of a defense of Supporting Life in response to some concerns expressed by a potential reviewer. We plan on having the response given the once-over by a professor moral theology just to make certain we're on solid ground. Now, if we could just be sure that the reviewer would change his mind yet again about giving a positive review now that we've answered all the (expressed) concerns . . . .

• We're asking all readers of this blog to go to Amazon and post (positive) reviews of the CESJ publications you've read. Maybe just a sentence or two, but 1) make sure you really read the book, and 2) give it five (5) stars.

• As of this morning, we have had visitors from 50 different countries and 42 states and provinces in the United States and Canada to this blog over the past two months. Most visitors are from the United States, the UK, Canada, Australia, and India. People in Venezuela, Greece, Honduras, Canada and Nigeria spent the most average time on the blog. The most popular posting this past week was once again "Thomas Hobbes on Private Property," followed by "Aristotle on Private Property," the first two postings on "Economic Recovery," and "Finding the Right Negatives."

Those are the happenings for this week, at least that we know about. If you have an accomplishment that you think should be listed, send us a note about it at mgreaney [at] cesj [dot] org, and we'll see that it gets into the next "issue." If you have a short (250-400 word) comment on a specific posting, please enter your comments in the blog — do not send them to us to post for you. All comments are moderated anyway, so we'll see it before it goes up.

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Economic Recovery, Part VIII: The Formation of Capital (3)

They can't say we didn't warn them. The only difference between what we and the (other) doomsayers predicted about Greece's and the other PIIGS's current meltdown is that we do not believe it was inevitable. It was only inevitable within the flawed economic and financial paradigm now afflicting the world. The newspapers (taking the Washington Post and the Wall Street Journal as "the newspapers") are full of the dangers inherent in the latest Greek disturbances, both economic and civil: "Greek Debt Crisis Nears a Tipping Point," Washington Post, 06/16/11, A1; "Stocks Tumble on News from Greece, Rise in U.S. Prices," ibid., A16; "Fresh Greek Shock Waves," Wall Street Journal, 06/16/11, A1; "French Banks Warned on Their Greek Debt," ibid., A14; "Greek Scare Spills Into U.S.," ibid., C1; and, of course, all the stories that have a tie-in.

The basic scenario, of course, remains unchanged: people are demanding that the government continue to fund its current programs at an acceptable level, maintain current levels of employment, and create new jobs to take care of the increasing numbers of unemployed. The problem, of course, is that the tax base won't — or can't — support even current spending, and governments' ability to mortgage future tax revenues is eroding rapidly throughout the world. People are refusing to face the fact that you can't consume what you can't afford today, and pay for it tomorrow forever, if only because if you can't afford what you consume today, what makes you think you will be able to pay tomorrow for what you consume today and tomorrow?

Keynes thought he had the answer: in the long run we're all dead. Yeah — but others will still be living (or trying to), and they are the ones who are going to have to pay for what we consumed today and meet their own needs on top of that.

The fact is, if we go into debt for consumption, we're sticking the next generation with the bill for our dinner, the old "dine and dash" that forces low income waitresses to pay for our meal. If we go into debt to finance new capital formation . . . we're rich (okay, affluent, but "rich" sounds better), and, potentially, without sticking anyone. The way things are being run, the debts we incur for today's consumption are being passed on to tomorrow's children — at least those we permit to be born, and they won't be able to pay, any more than Greece is able to pay now for yesterday's consumption. Somebody has to foot the bill for all those dishes you throw around and break at a dinner party, and it should be the ones who break them.

The problem is that a number of very bad assumptions have combined to create an even worse situation. One, the assumption that the only way to finance new capital formation is to cut consumption and save. Two, the assumption that human labor is the only thing truly productive, and wages the only way for most people to obtain income (related to "one") — the "labor theory of value." Three, the government can and should do anything and everything better than private citizens, especially control the financial system . . . for its own benefit. After all, four, if the government wasn't in debt, there would be no backing for the money, right?

Wrong. The ideas that the government can do everything better, and should be in charge of the financial system are two of the most damaging assumptions of all. We could probably go on forever believing that all those bills of exchange aren't money and new capital isn't financed on credit. So long as the economy keeps running using bills of exchange as money, who cares whether we believe it or not? Any first year accounting student should have learned enough to realize that most capital isn't really financed out of savings (retained earnings). You don't charge retained earnings for new capital investment. No, you charge an asset account, or increase a liability account. And this concerns you . . . how? Do you really know how your automobile works, or that electric light? Do you care?

We can also go on believing in the labor theory of value, and that the return to the owner of capital instruments is theft of surplus value from the worker and the consumer. As long as the capitalist is forced to pay an adequate wage to his or her workers, and the government taxes capital income to distribute welfare to the unemployed or those who can't work, things can keep going. Many people were astonished when businesses were able to show tremendous profits during World War II when the highest corporate tax rate reached 95%, and the highest personal rate reached 94%. Nor was this dependent on government deficits for war spending, at least according to Keynes. He actually protested using debt to finance the war in his book, How to Pay for the War (1940). This system eventually breaks down, but, given an otherwise sound economy and otherwise limited government, things can go on for some time. It's socialism, but even socialism can keep going for a while if the government limits itself to forcing the private sector to pay for government mandates directly, stays out of debt, and doesn't manipulate the financial system or inflate the currency. It's unjust, and contrary to human nature, but it can work . . . for a while.

No, it's those last two assumptions that are the killers. One of Ronald Reagan's favorite jokes was, "The nine most terrifying words in the English language are, 'I'm from the government, and I'm here to help." Unfortunately, it's not that funny. While many people today are demanding the closing down of the Federal Reserve and the vesting of the "money power" in the federal government "where the Constitution puts it" (no, it doesn't), they don't seem to understand that the federal government already controls the money power — the independence of the Federal Reserve is a legal fiction, and will remain such as long as the Federal Reserve deals in government securities, primary or secondary, purchased by discounting or in open market operations. It is government control of the central bank, and the fixed belief that without an outstanding national debt you won't have a money supply, not the income tax, that has permitted the incredible growth of government since 1916, and has put even the United States into a terrifyingly shaky financial situation.

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Economic Recovery, Part VII: The Formation of Capital (2)

Yesterday we noted that the facts of financial and economic history did not bear out the contention that the rich were always the ones to control the means of production — initially. When there is a breakthrough, the ones who know how to take advantage of the financial system are the ones who become rich, often displacing the old rich. This was the case when the new industrial and commercial magnates of the Industrial Revolution displaced the landed aristocracy, and when the computer revolution brought in a lot of new "dot com" million- and billionaires, displacing those whose fortunes depended on industry and commerce.

Of course, in the background are the managers of money, those whom Pope Pius XI referred to as a "despotic economic dictatorship," who "often are not owners but only the trustees and managing directors of invested funds which they administer according to their own arbitrary will and pleasure." (Quadragesimo Anno, § 105.) Thus, in one of the most startling paradoxes of history, the belief in the necessity of past savings to finance the new industrial and commercial capital ensured that ownership of the new wealth would be concentrated — but that control would be vested in the money managers. As Hilaire Belloc presciently — but incorrectly — analyzed the situation,

"Consider in what way the industrial system developed upon capitalist lines. Why were a few rich men put with such ease into possession of the new methods? Why was it normal and natural in their eyes and in that of contemporary society that those who produced the new wealth with the new machinery should be proletarian and dispossessed? Simply because the England upon which the new discoveries had come was already an England in which perhaps half of the whole population was proletarian, and a medium for exploitation ready to hand. When any one of the new industries was launched it had to be capitalized; that is, accumulated wealth from some source or other had to be found which would support labor in the process of production until that process should be complete. Someone must find the corn and the meat and the housing and the clothing by which should be supported, between the extraction of the raw material and the moment when the consumption of the finished article could begin, the human agents which dealt with that raw material and turned it into the finished product. Had property been well distributed, protected by cooperative guilds, fenced round and supported by custom and by the autonomy of great artisan corporations, those accumulations of wealth, necessary for the launching of each new method of production and for each new perfection of it, would have been discovered in the mass of small owners. Their corporations, their little parcels of wealth combined would have furnished the capitalization required for the new processes, and men already owners would, as one invention succeeded another, have increased the total wealth of the community without disturbing the balance of distribution. There is no conceivable link in reason or in experience which binds the capitalization of a new process with the idea of a few employing owners and a mass of employed nonowners working at a wage. Such great discoveries coming in a society like that of the thirteenth century would have blest and enriched mankind. Coming upon the diseased moral conditions of the eighteenth century in this country, they proved a curse." (Hilaire Belloc, The Servile State. Section 4, "How the Distributive State Failed." Indianapolis, Indiana: Liberty Fund Classics, 1977, pp. 100-101.)

The mixture of brilliant economic analysis and financial naïveté demonstrated in this passage is instructive. Trapped by the assumption of the necessity of accumulating savings before new capital can be financed, Belloc assumed that, had the first workers displaced by the new machinery pooled their savings, they would have been the owners, not the new industrial and commercial aristocracy that took the place of the landed aristocracy.

Belloc was partly right: whoever finances new capital owns that capital by right of private property — although they must be careful not to let control slip from their hands if they want to call their souls their own. Belloc was also completely wrong in supposing that the investments of the new industrial and commercial elite had been financed by the old landed elite. Had that been the case, it is obvious that power would never have shifted away from the landed aristocracy and to the industrial and commercial aristocracy. The former would have been the owners of both the land and the new capital.

This also puts period to the myth that America's tremendous industrial and commercial expansion of the latter half of the 19th century was financed from England. On the contrary, while there was some investment from England, by and large the financial capital of England was needed in England, suffering periodic currency crises as a result of the inelastic currency imposed by the Bank Charter Act of 1844.

This leaves the question: how is new capital formation financed? We find the answer in the third book in the series published by the Brookings Institution, The Formation of Capital (1935).

The most important point in The Formation of Capital is that economic progress and growth need not be limited to existing accumulations of savings. In fact, Moulton showed that the economy grows faster when it is not dependent on past savings, and businesses can employ future savings to finance their economic growth. As Moulton explained,

"Even though the flow of funds from individual savings for investment purposes may, for the moment, be inadequate, it is still possible to procure liquid funds with which to buy essential materials and employ the necessary labor.

"Funds with which to finance new capital formation may be procured from the expansion of commercial bank loans and investments. In fact, new flotations of securities are not uncommonly financed — for considerable periods of time, pending their absorption by ultimate investors — by means of an expansion of commercial bank credit." (Harold G. Moulton, The Formation of Capital. Washington, DC: The Brookings Institution, 1935, 104.)

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Economic Recovery, Part VI: The Formation of Capital (1)

As most modern authorities see it, the basic problem with binary economics is twofold. One, there cannot be widespread direct ownership of the means of production because ordinary people cannot afford to cut consumption and save. This is presumed to be the only way in which new capital formation can be financed. As Lord Keynes declared,

"The immense accumulations of fixed capital which, to the great benefit of mankind, were built up during the half century before the war, could never have come about in a Society where wealth was divided equitably." (Keynes, The Economic Consequences of the Peace, 1919, 2.III.)

Two, even if the authorities agree that widespread direct ownership of the means of production is desirable, it is a) not necessary, and b) the only way for those without property to gain ownership is by taking either savings or existing capital away from current owners and redistributing the loot. Implicit in this is the belief that only the State has the power to create money.

Once we begin investigating these claims, we realize a number of important facts. Most important, concentrated ownership of the means of production is not necessary to build up "immense accumulations of fixed capital." Were that the case, the United States would never have been able to finance its incredible industrial and commercial expansion in the latter half of the 19th century.

For that matter, Great Britain a century earlier would have found such expansion impossible under these assumptions. It is noteworthy that the great British fortunes of the late 18th and early 19th century were not industrial and commercial, but agricultural. As Walter Bagehot noted in unconscious refutation of the very theories he espoused about the operation of the London money market (The English Constitution, 1867, Lombard Street, 1873), the possessors of landed capital, the aristocracy, were not the financiers (and thus owners) of the new industrial and commercial enterprises.

The traditional nobility with their power and position based on control of landed capital and human labor, and which controlled the House of Lords, were in decline by the mid-19th century. It was the new moneyed aristocracy with its power base in the industrial and commercial centers that controlled the House of Commons through the "rotten borough" system who were really in charge. The rise of the new industrial and commercial magnates in both the United States and Great Britain was a "rags to riches" epic, as talented individuals used the science of finance, not existing accumulations of savings already in the hands of the landed aristocracy, to enrich the new elite, and put themselves in control of the new industrial and commercial capital.


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She-Devil of the G.O.P.

"Michele Bachmann" is an unlikely monarch (or moniker, if you prefer) for a "She-Devil." They're supposed to have names like "Ilsa of the SS" or "Swinhild" or "Bloodthirsty Witch" or something. Further, if you can get yourself labeled a "She-Devil," the least you can do is live up to your billing. Ms. Bachmann falls far short . . . unless having 3.8 more little tykes than the politically correct 1.2 offspring in addition to taking care of 23 foster kiddies sets a demonically bad example in this day of disposable people.

Her list of personal transgressions seems endless. Let the facts be presented to a candid world:

• She's part owner of a farm, probably a homestead stolen from the Indians — and the Homestead Act, as every Keynesian will tell you, destroyed the United States, caused the Great Depression, and forced the Japanese to bomb Pearl Harbor.

• She goes to church. 'Nuff said.

• She's (gasp) Pro-Life.

• She and her husband run a Christian counseling practice in Stillwater, Minnesota.

• She spent time on a kibbutz in You-Know-Where.

• She's a lawyer.

• She helped start a K-12 charter school, I mean skool, in Stillwater, and has protested against education-as-job-training, thereby undermining the teachers union and the state education monopoly.

• She's agin' "same sex marriage," having worked for a state constitutional amendment, thereby helping confuse voters by convincing them that the state might actually have the power to take over domestic society — the family — completely and permit "same sex marriage" unless it's explicitly prohibited.

• She's from the Midwest. Okay, Minnesota is right across from Canada, but that's not like, you know, New York, which is good next-to-Canada. This is the Midwest, so it's bad next-to-Canada. Them Gopheristas wear flannel shirts and talk funny, like the Swedish Chef on The Muppet Show.

Enough of Ms Bachmann's personal crimes. You're probably shuddering in horror by now, anyway. Let's focus on her economic and political felonies.

She's a "Tea Party" star. Since we're COCOA party — the same thing only better under a different acronym: Concerned Ordinary Citizens Of America — this means that we must Fight Her To The Death for daring to use a different word.

She's Austrian School, I mean Skool, in her economics. Egad. Why doesn't she just start goose-stepping? (Oh, that's right. The Nazis were socialists — "National Socialism." Never mind.) So what if our major difference with the Austrian school (I'd spell it "skool" again, but that's getting old) is to back the currency with private sector hard assets instead of gold, and to recognize private-sector bills of exchange as money, whether used directly or discounted and rediscounted at commercial banks and the Federal Reserve to ensure an elastic, asset-backed currency instead of government debt paper? It's a difference, and thim's fightin' words.

She opposes making loans to people who can't demonstrate creditworthiness. So do we, so she must be hiding something. I mean, come on. If she were really with the program, she'd see instantly how capital credit insurance and reinsurance could be used to replace traditional collateral, but only for the financing new capital formation, not consumption or government debt, especially for people who currently own little or no capital. What's wrong with this woman, anyway?

She favors reforming the Federal Reserve. Return the Federal Reserve to its original mission of providing a stable and asset-backed elastic currency to supply liquidity for the private sector instead of financing government deficits? You mean, like we've been saying for years? Dat woman mus' be crazy.

She opposed the auto company bailout. You mean the complete overthrow of bankruptcy law whereby the current administration rewarded the unions and screwed everybody else? Doesn't she realize that the bailout saved the global economy and laid the foundation for our present unbelievable prosperity?

She wants to lower corporate taxes. Enough is enough. We want to eliminate the corporate income tax by making dividends tax deductible, and finance new growth by discounting and rediscounting bills of exchange, supplemented with limited open market operations in private sector, not government, securities, adding the proviso that, to qualify for rediscounting, loans must be made in ways that create new owners. She's raving.

She favors a national sales tax. Bad idea. She says, however, it could easily mean a dual tax, with both an income tax and a sales tax, so she's not sponsoring the FAIR tax bill. Not like today, when we have a regular income tax and FICA. Stepping out of snarky character for a moment, a grossly simplified income tax would be much better than a sales tax, which falls heavier on those least able to pay . . . just like the special Social Security tax that taxes "earned" income (like there's unearned income aside from charity?) from the first dollar.

We kind of lost our momentum on this posting with the last comment — the dangers of stepping out of character. You get the idea, though. We think it would be mutually beneficial if Ms. Bachmann would agree to meet with Norman Kurland. Is there anybody out there who can help us with a contact or two? We will, of course, try from here, but a "third party endorsement" is always much better than a self-sales job. Somehow it comes across much better if you say how great, wonderful, terrific, etc., we are, than when we say it ourselves . . . about ourselves.

See what you can come up with and let us know (via the CESJ website). [http://www.cesj.org/]

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News from the Network, Vol. 4, No. 23

An interesting week, as usual. Issues are being clarified, and the world situation makes it increasingly plain that, without Capital Homesteading, there is little likelihood of any country coming out of this with a whole skin. The speculators on Wall Street and the politicians in Washington can comfort themselves with the wild fluctuations in the stock market, as if such activity is somehow a sign of healthy economic growth (yeah — like the convulsions and subsequent death rattle of a murder victim), but the rise and fall of the stock market (the Fourth Reich) doesn't actually do much to put food on anyone's table, or produce one marketable good or service that can be used directly or exchanged for food, clothing or shelter.

So why all the excitement and focus on the secondary market for corporate debt and equity? We have no idea. We prefer to concentrate on something a little bit more productive, like advancing the Just Third Way:

• Norman Kurland had a very good interview with a magazine journalist this morning on the subject, "Money is not evil." Naturally, we can't give out the name of the journalist or the magazine until the issue comes out (it's scheduled for July) — it makes no sense to give out exclusive interviews and then for the interviewee to "scoop" the journalist — but we can tell you that Norm was, as always, right on the mark. He focused on the importance of access to money and credit as a social tool that can be used to help people become capital owners rather than remain wage slaves, and outlined the critical role that Louis Kelso played, both in developing these ideas and getting them to prime movers like the late Senator Russell Long of Louisiana.

• The Coalition for Capital Homesteading group met on Friday. A number of important items were discussed, although due to limited time, the agenda was not completed.

• Wendy in Denver is intensifying efforts to get Norm a meeting with religious officials in the mile-high city.

• With the theme, "the death of the economy is the first step in the death of a civilization," Guy Stevenson has created a "Louis Kelso Mix" for YouTube with the title, "Louis Kelso: Saving the Economy. It is well worth sending around to your network.

• We have finished the first draft of a response to some (groundless) concerns that have been expressed about Supporting Life (the book) and Capital Homesteading (the proposal). We believe that we have managed to answer all expressed concerns, and are only waiting on receipt of some supplementary material cited by the concerned citizen before sending it off.  (By the way: Amazon has lowered the price of Supporting Life below wholesale, despite the fact that we've sent them a number of e-mails pointing out that they might want to correct this little error ... since they now lose money on every sale.  Either they're 1) ignoring "customer feedback," or 2) Amazon is one of the strongest corporate supporters of a Pro-Life economic agenda we've ever seen, willing to pick up a significant amount of the cost of the book for their customers.)

• As of this morning, we have had visitors from 49 different countries and 42 states and provinces in the United States and Canada to this blog over the past two months. Most visitors are from the United States, the UK, Canada, Australia, and Brazil. People in Nigeria, Honduras, Venezuela, Canada and Qatar spent the most average time on the blog. The most popular posting this past week was once again "Thomas Hobbes on Private Property," followed by "Aristotle on Private Property," the memorial to Robert P. Woodman, "Economic Recovery," and ""Finding the Right Negatives."

Those are the happenings for this week, at least that we know about. If you have an accomplishment that you think should be listed, send us a note about it at mgreaney [at] cesj [dot] org, and we'll see that it gets into the next "issue." If you have a short (250-400 word) comment on a specific posting, please enter your comments in the blog — do not send them to us to post for you. All comments are moderated anyway, so we'll see it before it goes up.

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Something Completely Different

Well, maybe not completely different. Just a fill in because we didn’t get today’s blog posting in the Formation of Capital series done. We still have to keep within the very broad parameters of the Just Third Way, i.e., the three principles of economic justice (participation, distribution and harmony) and the four pillars of an economically just society,

1. A limited economic role for the State,

2. Free and open markets within a just and understandable legal system as the best means of determining just wages, just prices, and just profits,

3. Restoration of the rights of private property, especially in corporate equity, and

4. Widespread direct ownership of the means of production, individually or in free association with others.

This last, the "fatal omission" in virtually all schools of economics today with the exception of binary economics, is the key to ensuring that people have the power (the "ability for doing") to conform their behavior to the precepts of the natural law.

Well, if you've been reading this blog, you know the drill.

The problem with the Big Number Four is that the typical responses take one of two tracks. One, you can't finance new capital formation without first cutting consumption and accumulating savings. This means that people who can't afford to cut consumption are permanently cut off from ownership.

Two, you can't finance new capital formation without first cutting consumption and accumulating savings. This means that the only way for people who can't afford to cut consumption to become owners is to take what somebody else already owns to redistribute to those who don't own (i.e., abolish private property— "For what property have I in that which another may by right take, when he pleases to himself? John Locke, Second Treatise on Government, § 140).

This explains why some people have claimed that the "Just Third Way" as applied in "Capital Homesteading" is impracticable, and advocates (or, in some cases, does not advocate) redistribution. Capital Homesteading does support redistribution of economic opportunity, and radically reduces the need for redistribution of existing wealth as the poor and middle class accumulate income-producing assets that generate new wealth.

Since most people can't afford to save the amount of money required to finance any meaningful amount of capital, the political and economic authorities have concluded that most people necessarily are limited to wages, not ownership, as the primary or sole source of income. The extremely short response to this concern is that financing capital is different from financing, say, a house, a car, or any other consumption item, and to realize that what exists now is not all that can exist.

The owner of capital doesn't pay for capital. Capital is expected to pay for itself. That is, if the capital you're considering purchasing won't generate sufficient income within a reasonable period of time to pay for its own acquisition (3-7 years is considered generally acceptable, depending on the type of asset), and thereafter continue to generate income for its owner, it is not "financially feasible," and should not be purchased.

That being the case, a prospective new owner of capital can locate capital that looks like it can pay for itself, and promise to deliver the purchase price to the seller at such time as the new capital starts generating profits— a credit purchase, which can be secured not with traditional collateral, but capital credit insurance and reinsurance. This allows the purchase of capital not out of past savings, but out of "future savings."

The new owner not only would not have to cut consumption to save, he or she would increase consumption once the capital is paid for. (This was, in part, Jean-Baptiste Say's explanation of "Say's Law of Markets" when Thomas Malthus expressed "alarm" at Say's theory.) This is because the purchase of capital goods is as much consumption to the seller of the capital goods as the purchase of consumption goods is to the seller of consumer goods; both are economically indifferent to the use to which the customer puts the good. Further, the new owner would save at the same time: it is an economic aphorism that "savings = investment."

Thus, increase investment (ownership of capital), and you ipso facto increase savings as the capital pays for itself. Saying that this is impracticable or even impossible is the same as saying that the power to make promises (liberty, freedom of association/contract) is impracticable or impossible— which we know is not the case.

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Economic Recovery, Part V: America's Capacity to Consume (3)

This is the third and, we hope, final portion of our analysis of what Dr. Harold G. Moulton called "America's Capacity to Consume." Why are we spending so much time on consumption when, clearly, the problem is lack of production of marketable goods and services and the employment of people to produce them?

Simple. We have to counter the Keynesian obsession with effective demand — the capacity to consume — that has, thanks to academia's and government's adulation of the Great Defunct Economist, distorted monetary and fiscal policy to the point where virtually every nation on earth faces potential bankruptcy as a result of creating endless demand with no provision to back it up with increased production of marketable goods and services — in simple terms, the belief that there is nothing but free lunch, and you can get something for nothing.

Yesterday we saw how when governments emit bills of credit, they are simply adding to existing claims on the supply of marketable goods and services in the economy. This is inflation, or, as another Great Defunct Economist, Milton Friedman, put it, "too many dollars chasing too few goods" . . . or something like that.

That's not the end of it, however. A private sector drawer of a bill of exchange has to demonstrate financial feasibility — "creditworthiness" — in order to discount the bill and use it as money or exchange it for another form of money in order to show the ability to make good on the bill when presented for payment, or be guilty of fraud. The government is under no such constraint. All a government need do to emit a bill of credit and increase its debt burden is to get it through the legislature or whoever holds the purse strings.

Nor does the government necessarily receive anything of value for what it expends. Creating money by emitting bills of credit to spend on entitlements, subsidies in the private sector or job creation in government does not result in the production of marketable goods and services. Consumption of such "services" in which nothing is produced is, to all intents and purposes, potentially unlimited: by creating increasing numbers of government jobs in a frantic effort to generate effective demand that Keynes claimed would solve all problems, consumption of unmarketable and ephemeral "services" that are of no value but cost a great deal can take place without any production taking place, utterly destroying the logic of Say's Law.

Thus, the private sector can only increase its liabilities to finance the production of future marketable goods and services by demonstrating a reasonable ability to produce marketable goods and services sufficient to make good on the bills when presented for payment. The amount of private sector debt, as long as credit is extended only for projects reasonably expected to pay for themselves out of future production of marketable goods and services, is irrelevant. An automatic constraint is built into the system. No claims can be created until and unless there is a reasonable expectation that the claims will be redeemed out of existing or future production of marketable goods and services.

The government, however, suffers from no such constraint when emitting bills of credit. Governments, if limited to their proper function, produce nothing. They borrow when tax collections out of what its citizens produce are insufficient to cover expenditures. Expenditures are not based on the built-in check of the private sector — invest only out of reasonable projections of future production — but on political expedience or necessity for consumption. These are not tied to the ability of the citizens to pay taxes in the future, but on what the government wants to spend.

Consequently, a government can create money by emitting bills of credit backed by future tax collections that may not be approved, out of wealth that doesn't exist and may never exist. By doing so a government has the potential to create unlimited claims not on the present value of existing marketable goods and services, but on the unquantified, possibly even unquantifiable present value of possibly non-existent future marketable goods and services. Giving the lie to the Keynesian theory that "money" consists of a general claim on the present value of existing marketable goods and services and no more, emitting bills of credit allows a government to create an outstanding debt that exceeds its ability ever to repay, spent on activities that produce nothing, and limited only by the government's own ability to spend.

For Say's Law (and a sane economy) to operate, consumption must be limited to the present value of existing marketable goods and services in the economy, and all new money created must finance new capital to produce marketable goods and services. "America's Capacity to Consume" cannot exceed "America's Capacity to Produce" without courting disaster.

The moment that it becomes apparent that a government has manipulated the currency so as to create more claims on future wealth that might not even be produced, confidence in the government — and thus the currency — plunges, with the result that we see now in Europe, especially the "PIIGS," where the desire to take care of everybody by printing money and creating non-productive "jobs" has ended in an impossible situation: the money created is backed by taxes that might never be collected out of wealth that might never be produced, spent on services that produced nothing of value, but which must be redeemed with something of value, or the country will go bankrupt.

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Economic Recovery, Part IV: America's Capacity to Consume (2)

Yesterday we claimed that misunderstanding money has led to what, under Keynesian economics, is considered impossible: governments with outstanding debt far in excess of their ability ever to repay. This has led to the situation in Greece that has panicked the politicos, and has given us a vision of the future for the rest of the world, especially the United States. World debt has grown to the point where it is entirely conceivable that it is unrepayable. How is this possible?

If, as the experts who adhere to the Currency Principle assert, "money" consists of a general claim on the total wealth of an economy, there can never be more debt outstanding than the government has the power to tax and repay, even if the tax rate is 100%. This theory, however, fails to take into account what money really is, the fact that you really can't consume without producing, and that money creation must be accompanied by (ideally, tied directly to via the institution of private property) an increase in the present value of existing and future marketable goods and services measured in real, not inflated terms.

Greece's problem (and that of the rest of the world) results from the fact that the private sector, where marketable goods and services are produced, creates money in a slightly different way than the public sector, that is, the government, which by its nature produces nothing in the way of marketable goods and services.

The private sector creates money backed by the present value of future marketable goods and services by "drawing bills." These "bills of exchange" — in 2008 estimated at roughly 60% of total transactions in the U.S. economy — can be used directly as money (trade or merchants' acceptances), or taken to a commercial bank and discounted in exchange for the bank's promissory note, which can then either be used directly as money, or used to back a demand deposit. Assuming that the drawer of a private sector bill of exchange is not engaged in fraud and drawing "fictitious bills," the exchange value of such bills is determined by the present value of the marketable goods and services in which the drawer has a private property interest, the value of which he or she has pledged to deliver when the bill is presented for redemption.

The public sector, "the government," also creates money backed by the present value of future marketable goods and services by drawing bills. These "bills of credit" (the "constitutional term" for bills of exchange emitted by a government to be used as money directly or exchanged for other money) are not, however, backed directly by the present value of existing and future marketable goods and services in the economy. Except in a socialist State, the government does not own that existing and future production. Rather, bills of credit (also called "anticipation notes") are backed by future taxes to be levied on existing and as-yet uncreated marketable goods and services that belong to the citizens.

Inflation comes in because most of the existing marketable goods and services in the economy already have bills drawn on their present value. This means that every time the government emits a bill of credit, it is adding another dollar to an existing dollar, creating two claims on the present value of an existing marketable good or service where there was only one before.

To make matters worse, existing marketable goods and services are consumed after being used to redeem the private sector bills of exchange drawn on their value, leaving the government bills of credit not backed by anything other than the government's own promise to pay . . . out of taxes collected on wealth (marketable goods and services) that no longer exists. When carried to extremes, as was the case in Germany and Austria-Hungary following World War I when Allied "reparations" stripped the countries of virtually all productive capacity, the currency ends up worthless and the price level rises faster than new money can be printed: hyperinflation, an example of what happens when you try to divide by zero.

But wait! There's more — which we'll get to tomorrow.

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Economic Recovery, Part III: America's Capacity to Consume (1)

In the previous posting in this series, we looked at the role production plays in restoring equilibrium to a market — the first "half" of Say's Law of Markets." To summarize very briefly (go back to the June 2 posting for a more extended treatment), Say's Law is that production equals income. Thus, if there are goods that remain unsold, other goods must be produced in order to generate the income that can be used to purchase the otherwise presumably "excess" goods.

Thus, Dr. Harold Moulton, following up on his work in America's Capacity to Produce (1934), could state in 1936 that one of the keys to economic recovery was increased production. Consistent with the other "half" of Say's Law of Markets," and given the shift away from small ownership to the wage system that characterized the 20th century, Moulton assumed that the other key to economic recovery was employment. As he explained,

"Production and employment are basic and ultimate points of reference in modern industrial life. Depression, like prosperity, is a phenomenon which is significant primarily in these terms, and no understanding of the factors of recovery may be gained without a thorough consideration of these two elements of economic activity." (Harold G. Moulton, The Recovery Problem in the United States. Washington, DC: The Brookings Institution, 1936, 114.)

Thus, without both production and consumption somehow tied together, there will be no true and lasting economic recovery. The facts of economic history are clear:

The U.S. was only able to come out of the first Great Depression (1893-1898) due to crop failures in Europe at the same time there were bumper crops in the United States. Fortunately, while there were increasing numbers of people dependent on wages alone for their income, the majority of Americans still lived on family-owned farms. The benefit of the increased production and sales of agricultural products went directly to the owner, who was also the worker, who naturally spent the income on consumption. This generated the effective demand needed to pull the country out of the first Great Depression without government intervention.

The U.S. was only able to come out of the second Great Depression (1930-1940) due to the increased demand for war material needed for the Second World War. This created large numbers of wage system jobs, giving the illusion that the State could somehow both mandate and create "full employment," but also generating the effective demand needed to pull the country out of the second Great Depression.

There were two problems with the recovery from the second Great Depression. One, the workers engaged in production of war material did not, in general, own the capital that was responsible for the bulk of production. Consequently, the income generated by capital did not go to workers who would use it for consumption, but to owners of capital who used it for reinvestment in additional capital.

Two, to finance the war the politicians used the politically popular debt financing that almost destroyed the Union during and after the Civil War, instead of unpopular taxation. Ironically, although cited as the authority for using debt instead of taxation, Keynes saw this as a serious mistake, as even within his badly flawed paradigm, increasing the money supply once full employment has been reached can destroy the economy through "real" inflation.

Using debt instead of taxes to finance the war effort, however, convinced "post Keynesian" economists and politicians that the deficit or the total outstanding debt doesn't matter. This creates a serious problem in the financial system.

Under the "Currency Principle," "money" is defined as coin, currency, demand deposits and selected time deposits. It represents claims on the present value of existing marketable goods and services in the economy. Thus, under the Currency Principle, the fiction is that all a country is doing when it inflates the currency, whether by monetizing its deficits by selling securities to the central bank, or issuing the currency directly (there is no substantial difference between the two, as Keynes recognized), is dividing up the existing pie into smaller and smaller pieces.

The reasoning appears to be that this is not a problem, for the outstanding debt is simply demands on existing goods and services. To eliminate the debt, all that is necessary is to print more money to pay it off, thereby shifting the debt further in to the future. If immediate payment is demanded, raise taxes and secure enough of the existing pool of wealth to satisfy immediate demands.  To get out of debt, cut spending.

Unfortunately, this reasoning does not hold up under scrutiny. "Money" is not just State-issued or authorized claims on existing marketable goods and services. No, money consists of anything that can be used to settle a debt. This includes claims issued by both the State and the private sector not only on existing, created wealth, but on future, uncreated wealth, that is, the present value of marketable goods and services to be produced in the future.

We will look at how this misunderstanding of money has led to the present situation in which governments have created outstanding debts far beyond their ability to repay — an impossibility in Keynesian economics.

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News from the Network, Vol. 4, No. 22

A short week, but a lot of work has been accomplished, at least on paper. There haven't been too many meetings, which is always a plus. At this point it's tempting to go into all the world problems that could be solved by judicious application of Just Third Way principles. It is, after all, becomingly increasingly obvious that something has to be done. The problem is that no one seems to be listening. This suggests that we need to redouble our efforts to open doors to prime movers. In the meantime:

• Discussions with the Fellows, both of whom are from African countries, have been very fruitful. Both have had important positions in their home countries, and have been seeing ways in which the principles of the Just Third Way can be applied to better the lives of ordinary people.

• CESJ has received an enquiry about a summer internship from a doctoral candidate from Turkey. We will be meeting with the prospective intern in the middle of June to see if there is a good "fit," and how best to benefit both the candidate and CESJ.

• Efforts are under way (or under weigh, depending on which source you accept — an issue as burning as whether it's a Tinker's dam or a Tinker's damn that you don't give a rat's tushy about) to arrange a meeting with an important Catholic prelate (a fancy word for "Bishop") at His Excellency's (hey . . . it's better than "His Lordship") earliest convenience. We have to wait and see — we understand that some important holy days are coming up which tend to take priority for some reason.

• In the "We're Not Complaining Just Wondering Department," sales of In Defense of Human Dignity seem to be edging up — there have been, so far, twice as many sold this month as last month. At the same time, the Amazon sales rating of Capital Homesteading for Every Citizen zoomed up, but our supplier has not reported filling an order of any size. If this is a spate of "panic buying" due to the announced revision of Capital Homesteading, don't worry. Whether we replace the current edition or keep it available to show historical continuity, the current edition is going to be available at least through the end of this year. (That's not to suggest you should stop buying the book . . . just don't panic and buy massive quantities. Just buy large quantities.)

• Work proceeds on a response to a critic who voiced some concerns about Supporting Life. The concerns, while serious, are not (we believe) valid, but we are doing our best to treat them with the respect the critic deserves. You never know. Someone's mind could change.

• We've noted a couple of times that people wanting to leave comments on the blog have been frustrated by the fact that the comments don't appear right away, and go away thinking that they have not been heard. Relax, don't worry, even have a homebrew. This is a "moderated blog," and all comments are reviewed before posting. This was necessary to prevent "trolls" from taking over the forum, although it has proven most valuable in deleting spamming advertising thinly disguised as comments, as well as a few comments (very few, actually) from posters who were clearly unhinged. Face it, we don't care how far you think your "freedom of speech" extends. You aren't going to use this blog to publicize anything we regard as deviant behavior or promote questionable products. Any questionable products promoted on this blog will be ours, not yours.

• As of this morning, we have had visitors from 51 different countries and 40 states and provinces in the United States and Canada to this blog over the past two months. Most visitors are from the United States, the UK, India, Canada, and Australia. People in Barbados, Nigeria, Honduras, Qatar and Portugal spent the most average time on the blog. The most popular posting this past week was once again "Thomas Hobbes on Private Property," followed by "Aristotle on Private Property," "Finding the Right Negatives," the memorial to Robert P. Woodman, and "The Keynesian Paradox of Thrift."

Those are the happenings for this week, at least that we know about. If you have an accomplishment that you think should be listed, send us a note about it at mgreaney [at] cesj [dot] org, and we'll see that it gets into the next "issue." If you have a short (250-400 word) comment on a specific posting, please enter your comments in the blog — do not send them to us to post for you. All comments are moderated anyway, so we'll see it before it goes up.

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Economic Recovery, Part II: America's Capacity to Produce

We believe that the current Great Depression (mislabeled a "recession," possibly for political reasons) may be a continuation of the Great Depression of 1930-1940. The Great Depression of the 1930s seems to have itself been a continuation of the Great Depression of 1893-1898. The Great Depression of the 1890s coincided with the closing off of access to capital in the form of "free" land for ordinary people with the effective end of Abraham Lincoln's 1862 Homestead Act.

To counter the Keynesian New Deal program, in 1934 the Brookings Institution published America's Capacity to Produce. This was the first volume in a study, "the Distribution of Wealth and Income in Relation to Economic Progress." America's Capacity to Consume (1934), The Formation of Capital (1935), and Income and Economic Progress (1935) followed in short order.

Looking at the titles from a Just Third Way perspective, we make what for a mainstream economist, trapped in the principles of the Currency School of finance, would be an astonishing — and incomprehensible — discovery: the titles are all components of something called "Say's Law of Markets."

Say's Law is named for Jean-Baptiste Say, a French political economist who (while he did not develop it) best expressed the "law." Most simply put, Say's Law is that production equals income, therefore supply generates its own demand, and demand its own supply.

Putting it that way, however, is misleading, if not simplistic. This is because within the existing "Currency School" paradigm, the "experts" do not recognize the full definition of money that goes into understanding "demand," and frequently reject anything other than human labor as productive, thereby not properly defining "supply." Mis-defining or misunderstanding either supply or demand virtually ensures that Say's Law will either be rejected, or redefined to fit into preconceptions.

This is why the exposition of Say's Law in Say's Letters to Malthus (1821) should be read before we jump to conclusions about what it means, or accepting without question the rejection of Say's Law by Karl Marx and John Maynard Keynes. It is relatively brief and to the point:

"All those who, since Adam Smith, have turned their attention to Political Economy, agree that in reality we do not buy articles of consumption with money, the circulating medium with which we pay for them. We must in the first instance have bought this money itself by the sale of our produce.

"To a proprietor of a mine, the silver money is a produce with which he buys what he has occasion for. To all those through whose hands this silver afterwards passes, it is only the price of the produce which they themselves have raised by means of their property in land, their capitals, or their industry. In selling them they in the first place exchange them for money, and afterwards they exchange the money for articles of consumption. It is therefore really and absolutely with their produce that they make their purchases: therefore it is impossible for them to purchase any articles whatever, to a greater amount than those they have produced, either by themselves or through the means of their capital or their land.

"From these premises I have drawn a conclusion which appears to me evident, but the consequences of which appear to have alarmed you. I had said — As no one can purchase the produce of another except with his own produce, as the amount for which we can buy is equal to that which we can produce, the more we can produce the more we can purchase. From whence proceeds this other conclusion, which you refuse to admit — That if certain commodities do not sell, it is because others are not produced, and that it is the raising produce alone which opens a market for the sale of produce." (Jean-Baptiste Say, Letters to Mr. Malthus on Several Subjects of Political Economy. London: Sherwood, Neely, and Jones, 1821, 2.)

In other words, if you can't produce anything to trade to others for what they produce, you won't be able to trade with them. You might be able to receive it as charity, or steal it, but neither of these can be called trade or exchange. Consequently, if you produce nothing, then no one can trade with you, and their marketable goods pile up, unsold.

This was the issue Moulton addressed in America's Capacity to Produce. Did the Brookings study reveal sufficient productive capacity — not necessarily production — to meet the needs, even reasonable wants, of everyone?

Yes. In fact, due to various factors, there was actually over-capacity in certain sectors of the economy. Had not vast amounts of money been created for speculation on the secondary market, triggering the Crash and upsetting the somewhat shaky equilibrium of the economy (caused by that same money creation for speculation), this over-capacity would likely have corrected itself within a year or so. The sudden plunge in share values in the Crash, and the loss of confidence in the credit system combined with the devaluation of collateral, however, resulted in a far more severe business downturn than would otherwise have been the case.

The first half of Say's Law was obviously covered. America had everything it needed to produce sufficient marketable goods and services to provide a decent living standard for everyone. The next issue to be addressed was whether America had the capacity to consume what it had the potential to produce, that is, was it possible to generate sufficient "effective demand" to purchase what the economy clearly had the capacity to produce?

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Economic Recovery, Part I: The Problem in the United States

In the early 1930s, at the height (or depth) of the Great Depression, the Brookings Institution undertook an in-depth study of "the Distribution of Wealth and Income in Relation to Economic Progress." The results were published in four volumes, America's Capacity to Produce (1934), America's Capacity to Consume (1934), The Formation of Capital (1935), and Income and Economic Progress (1935).

Dr. Harold G. Moulton, president of Brookings from 1916 to 1952, personally directed the study, which was funded by the Maurice and Laura Falk Foundation of Pittsburgh. As explained in the Foreword to the first, 1935 edition of The Formation of Capital (which we consider the most important book in the series), "Relation to a Larger Study":

"This is the third of four volumes devoted to an analysis of the relation of the distribution of national wealth and income to economic progress. The purpose of the investigation as a whole is to determine whether the existing distribution of income in the United States among various groups in society tends to impede the efficient functioning of the economic system.

"The study is concerned with something deeper than the causes of business depressions. The economic system, for some reason, never succeeds in operating at full capacity. It has been observed that even in periods of prosperity we have some unutilized plant and equipment and a considerable volume of unemployment. This situation not unnaturally suggests that there must be some basic maladjustment which seriously impedes the operation of the economic machine by means of which the material wants of society are supplied.

"The fact that business enterprises seldom produce at full capacity, and that the greatest problem of business managers appears to be to find adequate markets for their products, has raised in the minds of many business men and economists the question, Is not the primary difficulty a lack of purchasing power among the masses? This leads at once to the correlative question, What is the bearing of the distribution of income upon the demand for the products of industry? Concretely, if a larger percentage of our annual income were somehow made available to the purchasers of consumption goods, would not business managers find it profitable to utilize existing capital equipment more fully, thereby giving to the masses of people higher standards of living, and at the same time promoting a steadier and more rapid rate of economic progress?

"In endeavoring to throw light upon the great problem with which we are here concerned, we divided this investigation into four major parts. In the first volume, entitled America's Capacity to Produce, we attempted to get an objective and comprehensive picture of our economic society as a producing mechanism. To what extent had we piled up excess productive capacity in the United States during the boom period of the late 1920s? Was the amount of unused capacity increasing over the three decades from 1900 to 1930? We chose this period for study in order to focus attention upon the situation at its best — in a period of great technological advancement.

"The conclusions reached may be briefly summarized as follows: Idle productive capacity is not a phenomenon that appeared for the first time in the years just preceding the collapse of 1929. On the contrary, a considerable amount of unutilized capacity existed throughout the period under review. However, with the exception of transportation and a few other special lines, we found in general no persistent increase in the percentage of unutilized capacity. At the height of the boom period the amount of idle capacity, expressed in terms of a generalized figure, was something like 20 percent. In periods of depression this percentage is, of course, very greatly increased — rising perhaps as high as 50 percent in the current depression.

"In the second volume, America's Capacity to Consume, we directed our inquiry to the division of the money income which arises out of the nation's productive operations. This investigation and analysis was divided into three major parts. In Part I we showed, as accurately as available data would permit: (1) The amount of the national income and the extent of its increase during the first three decades of the twentieth century; (2) the division among the various claimants, such as wage earners and investors, and among the various income groups; and (3) its distribution on a geographic basis.

"In Part II we indicated how those who receive the national income dispose of it. We showed (1) the allocation of expenditures among the major types of consumers' goods; (2) how the amount that is spent for consumptive purposes by the several income groups compares with the amount which is saved, and the bearing of this apportionment upon the division of aggregate income as between spending and saving; and (3) whether there was any tendency during the period from 1900 to 1930 for the proportion of the aggregate income set aside as savings to increase as compared with the amount devoted to consumptive purposes.

"In Part III, entitled "The Relation of Consumption and Production," our findings were related in a broad general way to the conclusions reached in the preceding volume. We indicated the extent to which the demand for consumption goods would be modified by comparatively slight increases in the purchasing power of the lower income groups and compared these consumptive potentialities with the existing productive capacity of the nation. Finally, the analysis was related to certain important current issues, such as the fear of persistent over-production and consequent demand for restriction of output, the amount of leisure that is compatible with high standards of living, and the necessary length of the working day.

"The conclusions which pertain specifically to the primary issue with which the larger investigation is concerned were as follows: First, the masses of the people had very low standards of living and were able to make savings of negligible importance. Second, the productive capacity of the United States was not adequate to turn out sufficient goods and services to satisfy the unfulfilled consumptive desires of the American people as a whole. Third, owing to the uneven distribution of the national income the bulk of the national savings is made by a small fraction of the population. Fourth, the increasing number of people in the higher income brackets as the years have passed, and particularly in the decade of the twenties, has led to the diversion into savings as distinguished from consumptive channels of an increasing percentage of the total national income.

"These two volumes carried us a considerable distance toward an understanding of the modern economic system. They revealed, on the one hand, a persistent failure to make full use of our productive resources, and, on the other, a chronic state of under-consumption on the part of the great masses of the people. It is clearly apparent that consumptive requirements and productive possibilities are not satisfactorily articulated. The uneven distribution of income evidently has an important bearing on the problem.

"Before reaching any final conclusions as to the source of our economic difficulties it is necessary to give consideration to the process of capital formation. Having found that an increasing proportion of the national income tends to be saved rather than spent for consumptive purposes, we must inquire whether the result is to accelerate or retard the growth of capital. This is the task of the present volume. Then in the fourth volume — Income and Economic Progress — we shall bring together the various segments of our investigation for purposes of integration and interpretation with a view to indicating ways and means of bringing about a more effectively functioning economic system.

"In this analysis of capital formation it is not our objective to make a quantitative study either of the accumulation of investments by the American people or the growth of the national supply of productive capital. The purpose is rather to analyze the process of capital creation and the factors which govern the rate of growth of plant and equipment. National income is received by individuals chiefly in the form of money, and the savings of individuals are made, in the first instance, in the form of bank deposits, insurance payments, or investments in securities. Before actual productive capital can eventuate, these money savings of individuals have to be used by business enterprisers in employing labor and materials in the building of new plant and equipment.

"In the present volume we attempt accordingly to reveal what is involved in converting monetary savings into actual additions to capital equipment. We consider especially the connection between consumptive demand and the creation of new capital and the part which financial institutions, particularly commercial banks, have come to play in the process of capital formation. The conclusions reached as to the forces which control the growth of capital will be found fundamentally at variance with traditional views on the subject.

"The present study was foreshadowed by the author in a series of articles published in the Journal of Political Economy in 1918. The tentative analysis there presented has here been developed and elaborated. Thanks to the accumulation in the intervening years of more adequate statistical data, it has now been possible to subject some of the major issues involved to the test of factual verification." (Harold G. Moulton, The Formation of Capital. Washington, DC: The Brookings Institution, 1935, 1-6.)

As valuable as the study by Brookings was and remains (and should probably be performed again to be able to apply the principles to today's situation), it was a macroeconomic study, looking at aggregates for sectors of the economy and the nation as a whole. Only the final volume in the series, Income and Economic Progress, addressed the problem of inadequate individual income, and then, again, only in the aggregate. This left a rather large hole in the proposals, and may have accounted for the fact that the Roosevelt administration ignored the findings of the Brookings Institution, and followed the prescriptions of John Maynard Keynes.

True, as Friedrich von Hayek pointed out, Keynes's theories and programs are ultimately collectivist, actively undermining the individual human dignity that the Brookings proposals did not even address. Keynesian programs, however, did benefit individual voters — up to a point and at a hideous cost — and were thus more politically feasible than Brookings's financially and economically sound alternatives.

What we will try to do in this brief series is review the Brookings study, add the insights of Louis Kelso and Mortimer Adler, and then show how a viable program could be applied in a Capital Homestead Act.

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